Chelan County PUD Financial Strategy Sessions

Debt Policy Guidelines

Board PresentationNovember 20, 2017

We are here

Goal: Conduct series of Board strategy sessions to refresh long-term financial policies, establish Integrated Electric business line metrics, set next level of detail for debt funding philosophies and develop additional principles to guide revenue policies

Financial Strategy

Next Steps

Q1 2018

• Review current debt philosophy and planning strategies

• What’s changed since last Board strategy session

• Updated plan of finance

• Review Hydro funding tools and guidelines

• Updated Hydro funding guidelines

• Return Dec. 4 to seek affirmation of updated philosophies, guidelines and plans

No Action Today, Review Only

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Manage debt to create financial flexibilitythat supports low and stable electric rates

even if lower than expected financial results are experienced

Long Term Debt Philosophy

Liquidity LeverageBalancing Financial Health

Supports doing the best, for the most, for the longest

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Long Term Debt Planning Strategies

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• Maintain liquidity balance > $175M or policy minimum• Target debt leverage < 35% by 2019 and then remain below 35%• Execute planned accelerated reductions through 2020 as long as

liquidity allows• Plan “pay-as-you-go” renewal/replacement capital as long as

liquidity allows• Manage to lowest net interest (interest expense less interest

income)• Consider debt financing for modernization/expansion capital,

when needed • Borrow for long-term sustainability, not temporary challenges• Plan debt financings in 2 to 3-year intervals for cost-efficiency• Refinancing opportunities continually monitored

2017 Operational Plan of Finance: The “How”

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ForecastWindow Activity Action

“Lower Results”Mitigation Tools

2017Detailed Actions

Net Scheduled PrincipalEarly RetirementsNet New DebtRefinancing Actions

$23M$29MNoneNone

Scale backearly retirements

Decrease cost growth

Delay discretionary

capital

Incremental rate increases

2018 – 2021General Steps

Net Scheduled PrincipalEarly RetirementsNet New Debt*Refinancing Actions

$100M$133M$2MMonitor

2022 – 2027Broad Path

Net Scheduled PrincipalEarly RetirementsNet New Debt**Refinancing Actions

$241M None$171MMonitor

Net reduction in debt 2018-2027 of $301M* $2M related to SRF Loan: Wastewater-Peshastin/Dryden in 2019 ** Next new bond issuance forecast in 2022

Done

What’s Changed?• Financial results are good for 5-year horizon but challenges are forecasted beyond 2020 • Major changes compared to the 2015-2019 Strategic Plan

— $67M reduction in wholesale revenue forecast from decline in market prices through 2022— $147M increased capital investment in plant and facilities through 2022

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Debt Planning Modifications• Scale back on early debt retirements

— 2018,scale back $61 million accelerated, going from $85 million to $24 million — 2019,scale back $44 million accelerated, going from $86 million to $42 million— Expected case = 31.6% debt ratio in 2019 (achieves target of <35% by 2019)

• Implement certain debt payments 6 months in advance for coverage support and net savings

• Renewed use of borrowing on the planning horizon (2022), consistent with long term debt philosophy with focus on managing liquidity

— Update guidance philosophy to borrow for electric modernization/expansion capital while continuing to fund electric replacement capital through electric revenues. This will be continued discussion as part of the Q1 2018 Revenue Policy efforts.

• Continue annual debt plan review to ensure right balance of liquidity and leverage

Mitigation Tools

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2018 Operational Plan of Finance: The “How”

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ForecastWindow Activity Action

“Lower Results”Mitigation Tools

2018Detailed Actions

Net Scheduled PrincipalEarly RetirementsNet New Debt Refinancing Actions

$24MNoneNoneMonitor

Scale backearly retirements

Decrease cost growth

Delay discretionary

capital

Incremental rate increases

2019 – 2022General Steps

Net Scheduled PrincipalEarly Retirements*Net New Debt** Refinancing Actions

$114M$51M$40MMonitor

2023 – 2027Broad Path

Net Scheduled PrincipalEarly Retirements*Net New DebtRefinancing Actions

$167M $44M$231MMonitor

Net debt reduction 2018-2027, $129M, down from $301M reduction forecast from last year* Early retirements 6 months in advance for savings and coverage support** $1M SRF loan forecast in 2019 for WW; new bond issuance of $39M forecast for 2022

Overall debt continues to decline

Overall debt begins to grow slightly

District Combined 2017 2018 2019 2020 2021 2022

Liquidity - $175M Min (Expected) $402M $350M $289M $250M $193M $178M*

Liquidity - $175M Min (Unusual) $401M $343M $276M $231M $179M* $177M*

Debt Ratio (Expected <35% by 2019) 37.6% 34.8% 31.6% 28.8% 26.0% 25.1%

Debt Ratio (Unusual <35% by 2019) 37.7% 35.0% 31.9% 29.2% 27.2% 27.7%

Days Cash on Hand (Expected >250) 623 587 475 410 320 288

Days Cash on Hand (Unusual > 250) 622 576 454 378 297 286

Combined Debt Cover (Expected > 2.00x) 3.32 2.80 2.70 2.47 2.39 2.25

Combined Debt Cover (Unusual >1.25x) 3.31 2.69 2.58 2.34 2.17 1.93

Rate of Return (Expected > 4% thru 2019) 9.2% 6.0% 4.8%Sunset

Rate of Return (Unusual > 2% thru 2019) 9.1% 5.5% 4.3%

Bottom Line Results (Expected) $103M $72M $61M $49M $46M $40M

Bottom Line Results (Unusual) $102M $66M $55M $43M $37M $28M

Outstanding Debt (Expected) $537M $514M $473M $434M $393M $388M*

Outstanding Debt (Unusual) $537M $514M $473M $434M $408M* $428M*

* Assumes external debt issuances to maintain adequate liquidity. Includes revised debt strategy and facilities planThe information in this schedule contains forward-looking information and projections. Such projections are necessarily subject to various risks and uncertainties. Actual results could, and likely will, differ materially from those projected, in part as a result of differences between assumptions utilized in making such projections and actual outcomes and certain other risks. 10

Financial Policies

• The Debt Reduction Charge (DRC) and Capital Recovery Charge (CRC) are components of the long-term “cost-plus” power contracts used to pay for capital and/or reduce debt

• Utilization has been for capital expenditures pay-as-you-go

• In 2014, guidelines were established to assist with planning and expectations on the DRC and CRC percentages charged

• The objective was to accumulate sufficient funds to cover hydro capital and the DRC and CRC funds were forecast to be sufficient to cover capital through our planning horizon

• Increased investments at the hydro plants and facilities are now forecast to fully utilize the DRC/CRC funds and prompt the need for additional funding for hydro capital in ~2019

Hydro Funding Tools and Guidelines

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Guideline - Fund Level Criteria Fund Estimate DRC % CRC %

Fund Level $0 - $90 million 3.00% 50%5.0% Contractual Debt Balance

& 2.0 Years Capital Recovery Charge Base $90 million 2.75% 50%

7.5% Contractual Debt Balance& 2.5 Years Capital Recovery Charge Base $115 million 2.50% 50%

10.0% Contractual Debt Balance& 3.0 Years Capital Recovery Charge Base $140 million 2.50% 40%

12.5% Contractual Debt Balance& 3.5 Years Capital Recovery Charge Base $165 million 2.50% 30%

15.0% Contractual Debt Balance& 4.0 Years Capital Recovery Charge Base $185 million 2.50% 25%

DRC/CRC GuidelinesGuidelines: When the combined DRC and CRC fund balance reaches predetermined levels, charges may be adjusted as follows:

Changes to established percentages will follow the contractual provisions & Board approvalContract limits fund balances to 5 times capital recovery charge base amount

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DRC/CRC Expectations 2014 Forecast 2017 Forecast Charge assumptions Default % reduced as balance increases Maximum (3%/50%)

Balances through contract period Growing to 2024, then decline Depletion by 2019

Average annual DRC/CRC contribution* $29M $29M

Average annual capital expense $27M $53M

2018 year end balance forecast $113M $0M

What’s Changed?

Forecast: 2014: Apr 30, 2014, 2017: Oct 31, 2017

Even with max charges, the DRC/CRC funds will be depleted and require contractual debt financing (either internal loans or external debt) for RR/RI ~2019

*District contributes 49%, LT Purchasers 51%

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Net +$2Maverage/year

Net -$24Maverage/year

Updated Hydro Funding Guidelines

• Utilize DRC/CRC balances to the extent available

• New Contractual Debt Obligations for Rocky Reach and Rock Island when DRC/CRC funds are insufficient—Loans from internal unrestricted funds, if available—External borrowings, if internal funds not available

• Plans included in the annual Operational Plan of Finance update

• Follow stated guidelines should future DRC/CRC balances meet fund level criteria

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Debt Planning Modifications Summary• Scale back on early debt retirements while still achieving debt ratio

target of <35% by 2019• Implement certain debt payments 6 months in advance for coverage

support and net savings• When needed, borrow for electric modernization/expansion capital

and continue to fund electric replacement capital through revenue• Utilize DRC/CRC funding for hydros to the extent available• If DRC/CRC funds are insufficient, establish hydro Debt Obligations

first from internal unrestricted funds, if available, otherwise from external borrowings

• Continue ongoing debt plan review to ensure right balance of liquidity and leverage

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Next Steps

Q&A• Nov 20th through Dec 3rd

• Follow-up questions and answers

Affirm

• Dec. 4th

• Affirm Board support of debt planning modifications

• 2018 Operational Plan of Finance will also be approved through Budget adoption

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Appendix

(Additional descriptions of DRC/CRC)

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• The Debt Reduction Charge (DRC) and Capital Recovery Charge (CRC) are components of the long-term “cost-plus” power contracts

• Based on contract percentage– Chelan PUD 49%, Alcoa 26%, Puget 25%, Douglas is not included– Douglas PUD has separate contract terms and does not pay DRC/CRC

• The purpose of the charges is to forego additional debt by paying for capital “as-you-go” OR reduce outstanding contractual debt associated with the Hydros

• Utilization has been for capital expenditures pay-as-you-go• If used for contractual debt reduction, purchasers receive a credit

Debt Reduction & Capital Recovery Charges

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• DRC range is 0-3%– Applies to outstanding contractual debt balance– Default rate is 2.5% (currently Board set at maximum of 3.0%)

• CRC range is 0-50% – Applies to the CRC base ($25 million in 2004 $’s w/escalation)– Default rate is 25% (currently Board set at maximum of 50%)

• Percentage changes require Board approval• There are limits to the amount that can be accumulated and a

phase down during the last five years of the contract• The District retains any remaining balance at contract end

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Debt Reduction & Capital Recovery Charges